Labor spends up as China slows down

Concerns about a slowdown in China’s growth have sparked panic selling of iron ore that has seen the metal’s benchmark price collapse to a three-year low. In the past month alone, the price of iron ore delivered to China’s Tianjin port has tumbled by close to 25 per cent, dragging down the shares of companies such as
BHP Billiton
,
Fortescue Metals Group
and
Rio Tinto
.

This big dip in the spot price of iron ore not only highlights the Australian economy’s heavy reliance on exports of the metal to China, but also the glaring failure of our political leaders to implement the policy settings required to deal with increased exposure to commodity market volatility.

China now accounts for a quarter of all Australian exports, with the total value of shipments to the world’s second-largest economy jumping by more than 1000 per cent in the past decade to reach $77 billion in the 12 months to June 2012. Monthly exports to China are now nearly twice what we ship to Japan and dwarf Australia’s overseas sales to markets such as the United States and the European Union. But more than half of Australia’s shipments to China are a single commodity – iron ore – with coal also accounting for a big proportion.

Surging iron ore prices that reached an unprecedented $US191.90 per metric tonne in February 2011 at the peak of the first phase of the mining boom contributed to what Treasury secretary
Martin Parkinson
described this month as an unsustainable “bubble" in tax revenue for the federal government and helped Australia survive the global financial crisis.

Yet weaker demand from Chinese steel mills and increased competition from suppliers in South America and Africa have seen the price of iron ore halve since that time to $US90.30 per dry tonne this week.

While Dr Parkinson warned that the “buoyant" tax receipts of the mid-2000s that funded big-ticket spending and income tax cuts would not be repeated, the Gillard government has ignored the advice of its most senior econocrat. In the past month alone, Labor has announced plans for an unprecedented spending spree that, according to analysis by The Australian Financial Review, will require future governments to raise an additional $120 billion in revenue by the end of the decade. The plans include the National Disability Insurance Scheme, a new dental plan, and school funding reform following the Gonski report.

Wayne Swan
has grudgingly conceded that iron ore prices have fallen by more than what the government estimated at the time of the May budget. But the Treasurer disputes our analysis, saying among other things that we have created an artificial eight-year benchmark for assessing the budget. But this is our point: governments have created an artificial four-year horizon that lets them fiddle with spending and push difficult issues into the darkness beyond the estimates period. Our estimates may come from the back of an envelope, but this is better than the zero guidance provided by Canberra over the sustainability of our budget position and Labor’s central political narrative that high commodity prices will deliver super-sized profits to resources companies operating in Australia that should then be redistributed by way of the mining tax.

Notwithstanding their recent declines, global commodity prices are likely to remain at levels above those of the past few decades as China and India continue to industrialise and urbanise. Our commodity export volumes will also pick up substantially as the $260 billion currently in our mining investment pipeline comes on stream over the next few years.

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But Australia’s terms of trade have peaked and are declining from their record highs as commodity prices ease, leading to weaker nominal gross domestic product growth that will in turn reduce tax revenue and hit the budget bottom line.

Last week’s decision by BHP Billiton to mothball its $US20 billion Olympic Dam extension project was the clearest signal yet that the resources boom has entered a third phase that will see miners adopting a more cautious approach to future investment plans. This will probably mean mining investment starts to detract from GDP growth from 2014, about the same time some of Labor’s ambitious new spending plans get under way.

Yet the minority Gillard government appears oblivious to the price volatility of commodities such as iron ore and uncertainties about China’s recent slowdown, blithely handing out billions of dollars in goodies in a desperate bid to hold on to at least some of its traditional Labor voters at next year’s election.

The Coalition has a lot of work to do to convince voters of its fiscal prudence. But it is in opposition, not government.

Having already squandered much of the wealth that has been generated to date by the China-driven mining boom, Labor now seems intent on blowing anything that is left for their own petty political gain.